The Bank of England has cut interest rates from 4.5% to 4.25%, amid economic uncertainty in the wake of US trade policy.
It takes interest rates to their lowest level since May 2023.
The Bank’s Monetary Policy Committee voted by a majority of 5-4 to reduce rates for the fourth time since August 2024. Two members of the MPC voted for a larger 0.5% cut, while a further two members preferred to maintain the rate at 4.5%.
Luke Bartholomew, deputy chief economist at Aberdeen, said: “No surprises in the Bank’s decision to cut interest rates by 25bps. But the Monetary Policy Committee is clearly very divided on how policy should respond to the many shocks currently hitting the economy, with a three-way split in the voting pattern. This is highly unusual and will make it hard for the Bank to send a clear signal to the market about the likely path of policy.”
The MPC said uncertainty surrounding global trade policies has intensified since the imposition of tariffs by the US and the measures taken in response by some of its trading partners. It warned that prospects for global growth have weakened as a result of this uncertainty and new tariff announcements, although the negative impacts on UK growth and inflation are likely to be smaller.
Laith Khalaf, head of investment analysis at AJ Bell, said: “Trump’s tariffs have fed directly into this interest rate cut by pushing down energy prices, which has lowered the UK’s inflation forecast. That’s opened up space for the Bank of England to cut rates, even though inflation is expected to head upwards.
“The Bank now expects CPI to peak at 3.5% later this year, down from its previous forecast of 3.75%. It also reckons the rise in inflation will be temporary, which sounds a whole lot like the transitory inflation the Bank thought would dissipate in 2022, but in fact turned into the cost-of-living crisis. We should be wary of falling into the boy who cried wolf fallacy here. They may have previously got it badly wrong, but this time they may well be right.”
The 0.25% cut, which was in line with City forecasts, will be welcomed by borrowers, particularly those with variable rate mortgages or personal debt, but it will be a more mixed picture for savers and retirees considering an annuity.
Rosie Hooper, chartered financial planner at Quilter Cheviot, said: “Annuity rates, influenced by government bond yields, may experience downward pressure following the rate cut. Individuals approaching retirement should assess the timing of annuity purchases and consider a diversified approach to retirement income, possibly combining annuities with drawdown strategies.
“Given the recent market volatility too it is important that retirees take a careful look at their finances and don’t make any drastic decisions without getting help.”
The ongoing market uncertainty, coupled with the MPC’s divided approach, means attention will now turn to June, say experts.
Bartholomew said: “With the Bank maintaining its guidance that further cuts will be “gradual and careful”, the chance of another cut in June probably have fallen significantly. We still think the Bank will cut rates at least twice more later this year, but UK policy makers will want to see more data on how tariffs and domestic tax increases are being digested by the economy before moving decisively.
“Bailey may face questions about the UK-US trade deal, but its impact on monetary policy is likely to be relatively modest, even if it may help to further support risk sentiment.”
Adam Ruddle, chief investment officer at LV=, commented “Encouragingly, this reduction could signal a series of rate cuts, with interest rates anticipated to fall to 3.5% by year-end. This is very dependent on the path of US trade policies and any trade agreements agreed.
“Homeowners and prospective buyers will likely breathe a sigh of relief, as lower interest rates may lead to reduced mortgage rates. However, savers may see diminished returns on their deposits.”
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